As editor at large for Inside Asian Gaming following nearly a decade as a special correspondent for Macau Business magazine, I cover the casino business in Macau and throughout Asia. I’m also a columnist for Asia Times and The Guardian. After writing in the US for The New York Times, Washington Post, Sports Illustrated and others, I joined CNN as a news writer and producer in Washington, then moved to Hong Kong in 1995 (for six months, I thought) as a producer with CNBC. In Hong Kong, I returned to print at Bloomberg as a regional business editor, worked as an editor at both Hong Kong English language dailies, and headed Asia-wide media relations for a top US multinational. I’m also the author of Hong Kong On Air, a novel set during the 1997 handover about TV news, love, betrayal, high finance and cheap lingerie, and founder of Writing Clinic, where writing gets better. You can follow me via my website www.muhammadcohen.com, on Facebook and Twitter @MuhammadCohen.

Macau Casino Revenue Falls, VIPs Blamed, Investors Rejoice

Casino revenue in Macau fell in June by 3.7% year on year to 27.2 billion Macau patacas (US$3.4 billion), according to figures released Tuesday by Macau’s Gaming Inspection and Coordination Bureau (DICJ). The early smart money pins the fall in gross gaming revenue (GGR) on a double digit drop in VIP revenue, as much as 20% according to one report.

Investors seem to believe the June decline is the buy sign they’ve been waiting for after a sharp drop in the share prices of Macau gaming stocks in recent months. New York traded Macau casino parent companies Las Vegas Sands, Wynn Resorts, MGM Resorts International and Melco Crown Entertainment all showed gains of better than 1% in mid-afternoon, following the lead of their Macau traded shares. They apparently view the June figures, in line with forecasts, as a signal that Macau’s gaming growth slowdown has bottomed out.

June’s revenue figure represents the first monthly decline from the previous year since June 2009, which marked the low point of the Macau casino sector’s only real rough patch since gaming liberalization became a reality in 2004. In a note issued within hours of DICJ’s announcement, Union Gaming Research Macau analysts Grant Govertsen and Felicity Chiang point out that from the June 2009 decline, “Macau went on an unprecedented run [with] tripling of GGR from approximately US$15 billion in 2009 to US$45 billion in 2013.” But this time, things may be different.

From mid-2008 through mid-2009, Macau’s problem was mainly political with an overlay of economic factors. Govertsen and Chiang contend that the same combination is behind the June decline. They estimate that June mass market revenue grew at its customary recent clip above 30%. That means VIP revenue fell by around 20%. These analysts believe the VIP decline primarily stems from President Xi Jinping’s anti-corruption campaign in China. That’s not a universally held view.

Wells Fargo Securities senior analyst Cameron McKnight sees China’s economic slowdown as the main culprit. with the decline in credit growth a leading indicator for lower VIP revenue growth. In a mid-June report, Morgan Stanley Asia managing director Praveen Choudhary also cites mainland economic factors as the primary reason for the VIP revenue slowdown. Some blame the World Cup, which Union Gaming concedes “could be responsible for a few hundred basis points of the VIP decline.”

The 2008-09 slowdown began when mainland China authorities severely restricted visa access to Macau. When Beijing restored the flow of visitors, the bad times ended and gaming revenue took off, even though the impact of the global recession lingered elsewhere. This time, whatever your preferred cause for Macau’s VIP revenue decline, there’s no obvious switch that would end the slowdown. Don’t look for President Xi to go on CCTV to declare “Mission Accomplished” in the war on corruption, and don’t expect his government, which appears seriously committed to slow credit expansion and move toward more sustainable growth, to reopen the monetary spigot or provide other forms of fiscal stimulus at previous levels.

Govertsen and Chiang “expect to see VIP continue to be soft over the near-term, and would not to be surprised to see overall GGR continue to decline in the low/mid-single digits throughout the summer.” Standard Chartered Hong Kong based analyst Philip Tulk estimates every 1% decline in VIP revenue knocks 0.3% off Ebitda, so a 20% VIP drop implies a 6% fall.

The Union Gaming analysts add that a substantial sustained decline in VIP revenue hasn’t been factored into consensus estimates for revenue and earnings, so more forecast revisions could be ahead. If Tuesday’s market action is any indication, further bad news could drive share prices even higher.

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Tim’s point about mass market revenue being much more profitable than VIP play is absolutely true. But I don’t think that’s what last week’s rally in Macau gaming stocks was about.

Year on year mass market revenue has been growing at better than 20% monthly for at least 33 consecutively months, well over 30% in most months, and ran well over 30% for the first half of this year. Despite that robust mass market growth and a rosier outlook including new casino openings for next year and beyond, Macau casino shares traded in Hong Kong fell 20% on average for the first half of the year. So it wasn’t mass market growth that drove the rally in Macau share prices last week.

I think investors believed that June’s decline in gross gaming revenue (GGR) represented a cataclysmic event and therefore had to be a market bottom. In general, calling a market bottom is better left to historians or those aspiring to be a cartoon elephant that flaps its ears to fly, minus its final vowel. For Macau in 2014, given the high monthly second half revenue comparisons from 2013, more declines in monthly GGR are quite possible.

Wells Fargo senior analyst Cameron McKnight reports July GGR is at tracking flat to single-digit negative though Sunday, and he expects downgrades to earnings estimates for the upcoming quarter. We’ll see what Macau gaming share investors think of that.